Currency Crisis, Monetary Policy and Corporate Balance Sheet Vulnerabilities

S.C.W. Eijffinger, B.V.G. Goderis

Research output: Working paperDiscussion paperOther research output

299 Downloads (Pure)

Abstract

This paper studies how the exposure of a country's corporate sector to interest rate and exchange rate changes affects the probability of a currency crisis.To analyze this question, we present a model that defines currency crisis as situations in which the costs of maintaining a fixed exchange rate exceed the costs of abandonment.The results show that a higher exposure to interest rate changes increaes the probability of crisis through an increased need for output loss compensation and an increased efficacy of monetary policy in stimulating output.A higher exposure to exchange rate changes also increases the need for output loss compensation.However, it lowers the efficacy of monetary policy in stimulating output through the adverse balance sheet effects of exchange rate depreciation.As a result, its effects on the probability of crisis is ambiguous.
Original languageEnglish
Place of PublicationTilburg
PublisherMacroeconomics
Number of pages34
Volume2005-113
Publication statusPublished - 2005

Publication series

NameCentER Discussion Paper
Volume2005-113

Keywords

  • currency
  • financial crisis
  • monetary policy
  • foreign debt
  • balance sheets
  • short term debt

Fingerprint Dive into the research topics of 'Currency Crisis, Monetary Policy and Corporate Balance Sheet Vulnerabilities'. Together they form a unique fingerprint.

  • Cite this

    Eijffinger, S. C. W., & Goderis, B. V. G. (2005). Currency Crisis, Monetary Policy and Corporate Balance Sheet Vulnerabilities. (CentER Discussion Paper; Vol. 2005-113). Macroeconomics.